Citi analysts warned investors of potentially overheated sentiment in artificial intelligence (AI) stocks.
Their note highlights how optimism around AI stocks has reached its highest level since 2019, based on factors such as market expectations and historical price movements.
“Sentiment around stocks with high AI exposure is the highest since 2019,” Citi said.
This concern stems from a combination of factors. First, Citi’s estimates for the future growth of these stocks are significantly lower than what market prices currently imply. Second, AI stock’s recent price appreciation has significantly exceeded historical growth trends. Finally, the options market data indicates a potential imbalance toward bullish bets on AI.
Citi recommends taking advantage of this situation by taking profits on high-flying AI stocks, especially those in the enabler category such as semiconductor companies. “We continue to recommend that investors take profits in AI high-flyers,” Citi advises.
Investors can then reinvest these profits ‘broader in the theme’s value chain’, creating a more balanced portfolio within the AI sector.
For those who are even more cautious about the AI market, Citi offers an alternative strategy: the AI Hedge Basket.
This basket is designed to benefit from a potential decline in AI stocks. “We are introducing the AI Hedge basket as an alternative to outright shorting,” Citi explains. The basket prioritizes companies with a negative correlation to stocks with high AI exposure, providing hedge against potential losses.
